Why did the subprime money pipeline shut down? And which bank was buying mortgages from brokers and lenders? HSBC of course. Subprime and second mortgages were to HSBC like Household International was to predatory lending – an easy ride to profits. Or so they thought. Second mortgages? Sorry, but HSBC has little or no security interest when a home goes to foreclosure.
HSBC bought lots of mortgages. It was the top buyer of loans from Fieldstone Investment in Columbia, Md., a large mortgage originator. According to Fieldstone’s securities filings, HSBC bought Fieldstone mortgages with a face value of $1.2 billion in 2005. By March 2006, the second-lien loans on HSBC’s balance sheet totaled $10.24 billion, up from $6.3 billion in September 2005.
The old Household branch network didn’t reach everywhere, and HSBC was eager to boost the size of its mortgage business quickly. So it became a big buyer of subprime loans originated by others, which it held in its own portfolio. HSBC purchased loans from approximately 250 wholesale mortgage companies, which themselves bought the loans from independent brokers and banks.
When HSBC realized the error of their ways they pulled funding from many of the companies that then went out of business. Job losses and unemployement followed. To date only 600 job losses have been reported by HSBC, but around 80,000 have been residual casualties. And what about the bad loans and resulting foreclosures? Lost security clearances, more job losses, and loss of one’s home are obvious.
Please consider the impact on investors and pension funds. These were savers who were told that AAA bond ratings and safe investments were good for their future. In reality some of the bonds were an F-minus.
Here is what really happened at HSBC. William F. Aldinger sold predatory lender Household International to HSBC, and HSBC thought they would expand rapidly in America. Aldinger worked for HSBC for two more years, until 2005. Constantly stoking the fires, all the while telling HSBC what a great deal they got, was Aldinger’s smoke screen. HSBC, grinning from ear to ear, kept right on sailing the ship into the fog while believing everything Aldinger said. HSBC’s Titanic hit an iceberg in late 2006, but by that time Aldinger was gone. But that wasn’t enough for HSBC, and in 2006, the main operations of HSBC Mortgage Services moved from Charlotte, N.C., to a new Fort Mill, S.C., facility, which HSBC said offered 60% more space to accommodate expected growth. The unit also added to its mortgage-processing staff in Florida.
By the summer of 2007 people outside of HSBC – and around the world – realized their jobs were gone and their futures were upside down. Borrowers realized their homes were destined for foreclosure. Investors around the world realized they lost billions. And Aldinger was gone. Household International, complete with the specter of predatory lending, rose from the ashes as HSBC Finance Corporation. Together with HSBC Plc, the predators ran wild through America while regulators were blind to what was happening. In fact at the OCC, Julie Williams said there were no predatory lenders under the supervision of the OCC. By the way, Julie Williams is gone now too.
For more on this subject I recommend a fine article by a reporter I’ve had the pleasure of speaking to Mr. Carrick Mollenkamp of the Wall Street Journal.